The 15 Percent Solution

The 15 Percent Solution

By Paul Winters, 04/27/2008

Politicians are now beginning to call for a repeal of the Renewable Fuel Standard (RFS). Sen. Kay Bailey Hutchison (R-Texas) recently announced that she would introduce legislation to freeze the biofuel mandate at current levels, saying, “Expanding biofuels while refusing to take other measures, such as lifting the ban on oil and natural gas production in Alaska and the Outer Continental Shelf, is counterproductive.”

But will relaxing or freezing the RFS reduce food prices and quickly make more grain available? Will it make more fuel available? Unlikely.

New York Times blogger Mike Nizza gives a run down of the many factors behind the current rise in prices for grains. He includes the usual suspects — energy prices, droughts and increased demand from growing economies in Asia — and notes some longer term factors such as trade barriers. Nizza notes that the International Food Policy Research Institute attributes 25 to 30 percent of the global rise in grain prices to biofuels, and the UN Food and Agriculture Organization attributes 10 to 15 percent of the current rise in food prices to biofuels.

There are food shortages because oil is nearing $120 a barrel. The necessary evil, oil, is the fuel behind all the food production in the world, so when the price soared over $100 a barrel, the poorest people took the brunt of the shock. In short, they ran out of food.
“Rather than branding biofuels the villain of the food crisis, the blame should be aimed at the persons pricing the oil.”

I’ve noted before that OPEC has not increased production to meet rising demand. It’s also true that oil companies have not expanded refinery capacity to meet demand. According to the Energy Information Administration, in 2006 oil companies planned to expand refinery capacity by 1.5 million barrels per day by 2012; but in 2007 oil companies cut expansion plans to 1 million barrels per day by 2012.

With high oil prices, reserves continue to decline. Economic consulting firm KPMG International polled financial executives from oil and gas companies back in April 2007, indicating then that oil reserves and prices were a problem. 34 percent of those polled said that declining reserves were a “major concern” for the industry, and 60 percent predicted that oil reserves would continue to decline, due to rising demand from emerging markets.

A big question out there is whether OPEC can open the spigots and bring energy supplies in line with demand. Even if they are able to do so, eventually, there remains a question about the ability of U.S. refiners to meet demand.

The need for alternative energy remains. And a few environmentalists still believe the RFS is the right policy for reducing greenhouse gases. See for example Nathanael Greene of the Natural Resources Defense Council: “The RFS just adopted is not perfect, but it is the first biofuels policy to mandate a shift in our production practices in a way that will address these challenges.”

Because of this new market and 21st-century agriculture practices — less fertilizer, less water, drought-resistant grains and increased yields on existing agriculture land — more crops are being planted and harvested, increasing supply at a time when, in the United States at least, a legislative cap actually restricts the amount of corn that can be directed toward ethanol production.”

A medium- and long-term benefit of high commodity prices may be that the governments in poor countries will be able to justify the testing and commercialization of critical gene-spliced food crops such as rice and wheat. Countries like China have this new technology ready to go, and the licensing of gene-spliced rice and wheat will quickly boost yields, and because of better insect, disease and weed control, reduce the costs of production.”

Opening the Alaskan Wilderness to more oil drilling is not the answer when capacity is constrained by the lack of refineries. Sitting down with our OPEC friends is a more direct answer to the world’s current energy problems.

It is more than a coincidence that refinery capacity has not been increased significantly for many years, along with regular constraints by OPEC to keep fuel prices artificially high. These conspiring forces are very well explained in the very humorous but factual book by Greg Palast entitled “Armed Madness”. This is a “must read” but it get you excited no matter what side of the political aisle that you live. It is strong enough treatise with enough facts to make you change aisles.